A Sustainability Conversation about the Green Bond Market

by By Michael Aiyetan, MBA ’16 and Environmental Finance and Impact Investing Fellow
By Michael Aiyetan, MBA ’16 and Environmental Finance and Impact Investing Fellow

A conversation about green bonds underscored the need for defining and setting general standards for the green bond market.

The course, ‘Strategies for Sustainability,’ taught byProfessor Glen Dowell which is part of the Sustainable Global EnterpriseImmersion, gave me the opportunity to gain an understanding of the role thatbusiness can, and must, play in moving toward a more sustainable future. Themajor assignment for the course involved engaging in a conversation with regardsto a sustainability issue that one cares about. For me the issue is the greenbond market – the environmental finance aspect of sustainability in regards tothe issuance of green bonds. As a result, I had an interesting conversation witha seasoned professional who has consulted on the potential viability of manygreen bond issues.

During the conversation, I got answers to questions that Ihave always wanted to ask about green bonds. These questions include: What isthe true meaning of a green bond? Would green bonds be the best financialsolution for an issuer? In what way can green standards be established for bondsand the use of its proceeds? What sort of assurance should be considered andwhat should be monitored? How should reporting be performed during the life ofthe bond? I prepared for the conversation by first trying to understand the currentmarket standards and learning about the GreenBond Principles, the ClimateBonds Standards, green bond indices and so on. These standards each have a differentpurpose and approach. They are evolving and are sources of guidance for greenbonds.

Currently, the global green bond market is growing rapidlyand the value of the bonds is estimated to reach US$158 billion dollarsoutstanding in 2016.[1]Issuance of green bonds has extended beyond Multilateral Development Banks tonew issuer categories such as public institutions, utilities, corporations, andfinancial institutions. As a result it is increasingly necessary for the marketto maintain its integrity. The market represents a significant opportunity as someestimates predict that it could provide up to 84% of the private, third-partycapital necessary to finance the change to a low carbon economy.[2]It could provide the $53 trillion in additional energy investments needed by2035 to avoid catastrophic climate change.[3]For these reasons, upholding high standards and ensuring transparency in thegreen bond market is crucial.

Our conversation was not free of differences in opinions. Therewas disagreement on self-designating bonds as green by issuers. At present,there is no generally accepted market definition of a green project. As aresult, many projects that fall into several categories have been financed withvarious green bond issues. Although some definitions have been developed bydifferent groups, it is still open to issuers to self-designate the bonds. Sincethere is no universal agreement on definition, expectations vary by issue and issuer.These expectations will continue to evolve as the market matures. In order toavoid these varying expectations, a true definition should be developed and issuersshould not be allowed to self-label bonds as green.

The use of proceeds, reporting, and impact analysis areother areas where we had some disagreement. An opinion that green proceedsshould not be added to other funds, which are meant for an issuer’s existinggreen infrastructure initiatives, was met with disapproval. It was termedunnecessary – that proceeds can be added to other funds in an issuer’s treasuryas long as the green bond objectives are met. Overall, we both agreed thatmarket standardization is the answer to most questions and other concerns. Standardswill inform any issuer on how to separately manage the use of green bondproceeds from non-green bond proceeds. They would explicitly state reportingrequirements on those proceeds and provide guidelines on how to analyze theimpact of green projects.

I learned from the conversation that there is a rich set ofperspectives about how the market for green bonds can continue to grow with purpose(i.e. mobilizing private sector financing for climate-friendly investments) andwith integrity. I learned that “one size does not fit all” in regards to themeaning of “green” and the financial information of the bond. I also learnedthat it would be better to keep the “green” simple and allow a clear approachthat works towards progress, without making “perfect to be the enemy of good.” Allmarket participants – issuers, intermediaries, and investors – should keep tohigh standards and take responsibility for their roles, so the green bondmarket can achieve its goals. The interests and motivations of key marketplayers should be completely aligned.

[1] Jessica ShanklemanJess_Shankleman, ‘Green Bond Market Will Grow to $158 Billion in 2016, HSBCSays’, Bloomberg.com<http://www.bloomberg.com/news/articles/2016-01-26/green-bond-market-will-grow-to-158-billion-in-2016-hsbc-says>[accessed 1 April 2016].

[2] ‘Whitehouse, Lacy, et Al.“Carbon Capital: Financing the Low Carbon Economy”, Accenture, February 2011,p.58.’

[3] As You Sow Foundation, ‘As YouSow – Corporate Accountability, Shareholder Action, and Toxics Reduction’<http://www.asyousow.org/ays_report/green-bonds-in-brief/> [accessed 21February 2016].